Cleanup measures at Reebok India could more than halve the brand's sales in the country from next year. After large-scale irregularities were allegedly discovered earlier this year, the Adidas Group said that it would reform Reebok's relationship with retailers and franchise partners by the end of the year, which could lead to the reduction of about one-third of its mono-brand stores. But last week, the company said that Reebok would in fact lose at least half of its points of sale in India, which would have roughly the same impact on its sell-in.
As previously reported, the main point of the reforms is to quit operating on the basis of minimum guarantees offered to franchise partners who ran about 1,100 Reebok mono-brand stores in India. This led to protests and even virulent demonstrations among some of these partners, who rejected the proposed deal and demanded compensation. Herbert Hainer, chief executive of the Adidas Group, said that the company already had reached agreements with most of Reebok's largest Indian accounts to operate with the new model, while discussions with others were still ongoing. In any case, he said minimum guarantees would no longer apply for any customers from the start of next year.
Reebok's sales in India were estimated at about €200 million at retail level two years ago, before they started to decline last year, leading to unsettling inventory issues. The heightened impact of the cleanup appears to indicate that the company ran up against more resistance than it expected among former franchise partners, or that fewer of them had the potential and the resources to operate sustainably with the new model.
Meanwhile, Indian newspapers reported at the end of last month that police had arrested several former Reebok India executives in September and held them in judicial custody for several weeks, as part of their investigations into alleged fraud at the company. It appears that a dozen executives were arrested, including the former general manager of Reebok India, Subhinder Prem Singh, and its former chief operating officer, Vishnu Bhagat.
Forbes India, which has been reporting extensively on the case, alleged that the minimum guarantee had been an opportunity for former Reebok executives to obtain kickbacks from retail partners. The newspaper also insinuated that Singh made his own deals with suppliers in India, and this was one of the reasons sourcing for Reebok India was not integrated into global sourcing operations. This is one of the changes that will occur as part of the cleanup: Reebok India will continue to work with Indian suppliers, partly as a means to avoid high import duties, but sourcing for India will be aligned with the global operations.
Indian newspapers expected that the Serious Fraud Investigation Office (SFIO) would submit its report on the alleged irregularities this month. They further reported that a hearing was scheduled in the Delhi High Court on Nov. 22 in a defamation case filed by Singh against the Adidas Group.